Make In India: Consider These Small –Mid Cap Defence Stocks

India’s armed forces have the great responsibility of guarding the nation and take part in humanitarian activities connected with man-made and natural disasters. Naturally enough our Army, Navy and Air Force needs to be strong enough on weapons and arms with the most sophisticated technology.

The ‘Make in India’ programme was made applicable for defence sector as well and has led to large scale involvement of private sector in defence technology development supplementing the efforts of public sector heavy weights such as Bharat Electronics Ltd (BSE: 50049, NSE: BEL), BEML Ltd (BSE:500048, NSE: BEML).

The changes in Foreign Direct Investment (FDI) policy enhancing it from 26% to 49% and Defence Procurement Procedure (DPP) that provided greater thrust to Make In India programme with Indigenously Designed, Developed and Manufactured. The Strategic Partnership Policy (SPP) was designed to increase the involvement of private sector in defence. Initially it will be in fighter aircrafts, helicopters, submarines and armored vehicles and tanks).

Amidst the positive sentiments in defence industry, here is a look at the prospects of major private players.

#Zen Technologies Ltd (BSE: 533339, NSE: ZENTEC) Category: Small CapZen Technologies Ltd was incorporated in 1993 with the objective of design, development and manufacture of world-class state-of-the-art training simulators. It is actively involved in the indigenization of technologies for defence sector. It was the first Indian company to commercialise PC-based simulation technology for training simulators. It has leadership in firearms, tank, driving, mining and unmanned aerial vehicle simulators.

At the recent Defexo18, it showcased Live Laser Based combat simulators, virtual training systems and live fire smart ranges including containerized tubular shooting range, containerized indoor shooting range, mobile robotic target system among others. In October 2017, the company received its biggest ever order of Rs 224 from domestic market from Indian Government of which Rs 156 cr was for equipment and Rs 68 cr for annual maintenance contract.

The company achieved a turnover of Rs 65.27 cr in 2016-17 compared to Rs 58.08 cr the previous year while net profit rose to Rs 7.16 cr from Rs 2.131 cr the previous year. The company runs a Combat Training Centre (CTC) to help police and defence personnel hone their individual skills. With over 30 different types of simulators and systems and strong R&D, the company is capable of providing tailor made solutions for the needs of any country and force. In Q3FY18, net profit fell 97.80% to Rs 0.30 cr while sales dropped 73.59% to Rs 8.88 cr.

On a returns perspective, it has provided 98.7% on half-yearly basis while annual returns were 85.46%.
Return on equity of 5.99%, on assets of 4.91%, net profit margin of 11.63% is comparable with peers but liquidity and cash flow may cause concern.
On technical charts, RSI of 51.97 indicates bullishness, MACD has witnessed a bullish crossover signaling buying trend to emerge and ADX of 12 indicates range bound trade.
Target: 140 Duration: 4 weeks.

#Premier Explosives Ltd (BSE:526247, NSE: PREMEXPLN) Category: Small Cap
Premier Explosives Ltd was established in 1980 by Dr A N Gupta, a gold medallist from Indian School of Mines, Dhanbad and has the honor of setting up an explosives unit with totally indigenous commercial explosive technology. It supplies solid propellants for Inda’s prestigious missile programmes such as Akash, Astra and LRSAM. It has a wide range of products and technologies in the manufacture of explosives and accessories- emulsion and slurry explosives, LD catridge explosives, plain detonators, cord relays etc. It has an R&D facility recognized by the Department of Scientific and Industrial Research (DSIR).

The company reported 25% growth in revenue in FY17 at Rs 231.4 cr as against Rs 185 cr previous year. Operating profit rose 36% to Rs 29.1 cr as against Rs 17.6 mn the previous year. From commercial explosives, solid propellants the company has diversified into propellant motors for Indian space programme. The company has strengthened backward integration by setting up an ammonium perchlorate plant and a rubber plant for insulating the propellant motors. It has incorporated a 100% subsidiary Pelnext Defence Systems Pvt Ltd in Telengana for the manufacture of ammunition and other defence products.

In Q3FY18, net profit fell 30.43% to Rs 1.60 cr while sales rose 21.71% to Rs 67.49 cr. Return on equity 10.78%, on assets 6.71%, net profit margin fo 6.28% ,liquidty and cash flow ratios are better. It is trading at a PE of 26.35 indicative of moderate valuation by market.
On technical charts, RSI of 51.78 indicates bullishness, while MACD line has witnessed a bullish crossover signaling a buying trend and ADX of 31 indicates uptrend.

Target: 400 Duration: 6 weeks.

#Solar Industries India Ltd (BSE: 532725, NSE: SOLARINDS) Category: Mid CapSolar Industries Ltd was established in 199583 by Satyanarayan Nandial Nuwal to trade in explosives and by 1995 it had grown to manufacturing industrial and military grade explosives. It was the first domestic supplier in private sector fo HMX and HMX compounded products to defence sector and has largest manufacturing facility for detonating cord and cast boosters.

The company reported 21.25% growth in net profit at Rs 57.68 cr and 8.11% growth in sales at Rs 465.68 cr. It has provided annual returns of 28.23%, and half yearly 7.85%. it has 25 manufacturing facilities spread across 8 states. The company reported 8.72% growth in sales at Rs 1711.28 cr in FY17 and net profit rose to Rs 185.44 cr from Rs 163.66 cr. The company seems adequately poised to tap opportunities in domestic and overseas markets. The company plans to set up a world class project for making of Bi-modular Charge Systems and fully integrated rockets which in the long run would play a crucial role in considerably reducing forex outgo.

It is trading at a PE of 75.59 indicating high valuation by market. On technical charts, RSI of 54.86 indicates bullishness while ADX of 16.47 indicates range bound trading and MACD has witnessed a bullish cross over indicating buying opportunity. Return on equity of 20.08, assets of 11.17%, net profit margin of 11.80 looks attractive while liquidity and cash flow ratios are below peer average.
Target: 1126 Duration: 6 weeks.

Summary
The Make In India programme and changes in Defence Procurement Procedure (DPP) have turned favorable for Indian defence industry. Several big and small industrial houses are now actively engaged in foreign collaborations to improve their defence technology supplies for various applications. L&T, Mahindra & Mahindra, Tata Group, Reliance, Adani groups are all encouraged by the new initiatives of Defence Ministry. The share of private sector is expected to double from 5% to 10% in the Rs 5000 cr defence orders given annually in the country. It is time for investors to take a serious look at the big and small players in this industry for selective exposure.

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